Graduate School of Business and Government Leadership

University of North-West

Graduate School of Business and Government Leadership

MBA/MPA Programme

ADM 007

1. CORPORATE GOVERNANCE

2.1Individual ethics in organisations

We define ethics as an individual’s personal beliefs regarding right and wrong behaviour. Although this definition communicates the essence of this concept, three implications of it warrant additional discussion. First, note that ethics are defined in the context of the individual people- have ethics from one person to another. For example, one person who finds a twenty-dollar-bill on the floor may believe that it is okay to stick it in his whereas another will feel compelled to turn it in to the lost-and-found department. Third, ethics are relative, not absolute: although ethical behaviour is in the eye of the beholder, it usually refers to behaviour that conforms to generally accepted social norms. Unethical behaviour, then, is behaviour that does not conform to generally accept social norms. In the sections that follow, we discuss the factors that influence the formation of individual ethics and consider ethical behaviour in an organizational context.( Throughout our discussion we make references to higher and lower ethical standards or behaviour that is more or less ethical; keep in mind that these distinctions are relative, as just discussed, as opposed to absolute)

The formation of individuals Ethics

As Figure 4.1 shows, and individual’s ethics are determined by a combination of family influences, peer influences, life experiences, personal values and morals, and situational factors.

FIGURE 4.1: Determinants of individual Ethics

Family Influences Individuals start to form ethical standards as children in response to their perceptions of the behaviour of their parents and the behaviours their parents allow them to choose. Children are more likely to adopt high ethical standards if they see that other family members adhere to these highs standards and if they receive rewards for conforming, and punishment for not conforming, to them. On the other hand, if family members engage in unethical behaviour s and allow children to do the same, those children are likely to develop low ethical standards.

Peer Influences As children grow and enter school, they are also influenced by peers with whom they interact every day. For example, if a child’s friends engage in shoplifting, vandalism, or drug abuse, he may decide to engage in these same activities. But if the child’s peers have high ethical standards and reject such behaviours as drug abuse or theft, the child is more likely to adopt these standards.

Life Experiences Dozens of important individual events shape people’s lives and contribute to their ethical beliefs and behaviour. These events are a normal and routine part of growing up and maturing. Both positive and negative kinds of events will shape and individual’s ethics. For example, if a person steals something and does not get caught, she may feel no remorse and continue to steal. But is she is caught stealing she may feel guilty enough to revise her ethical standards and not steal in the future.

Personal Value and Morals A person ‘s value and morals also contribute to his or her ethical standards. A person who places financial gain and personal advancement at the top of his list of priorities, for example, will adopt a personal code of ethics that promotes the pursuit of wealth. Thus he may be ruthless in efforts to gain these rewards, regardless of the costs to others. In contrast, if a person’s family is his top priority, he will adopt different ethical standards. One manager strongly influenced by his values is Kazuo Wada, a Japanese entrepreneur who is expanding his chain of grocery-and-department stores around the world. Each employee in his company must take lessons in the ancient religion of Seicho No Ie, and Wada uses its doctrines to guide every decision he makes.

Situational factorsA final determinant of individual’s ethics is situational factors that arise. Sometimes people find themselves in unexpected situations that cause them to act against their better judgement. For example, many people who steal money from their employers do so because of personal financial difficulties. Although this does not justify their theft, it does provide some context for understanding how people may behave unethically if they believe that they have no other choice in the situation.

Managerial Ethics

Managerial ethics are the standards of behaviour that guide individual managers in their work. Although ethics can affect managerial work in any numbers of ways, three areas of special concern for managers are summarized in Table 4.1

Special Areas of Concern for Managerial Ethics

Areas of Concern / Sample Issues
Relationship of the firm to the employee / Hiring and firing.
Wages and working conditions. Privacy.
Relationship of the employee to the firm / Conflicts of interest
Secrecy
Honesty and expense account
Relationship of the firm to other economic agents / Customers
Competitors
Stakeholders
Suppliers
Dealers
Unions

Relationship of the Firm to its Employees

The behaviour of managers defines the ethical standards according to which the firm treats its employees. This includes such areas as hiring and firing, wages and working conditions, and manager to hire a family member or other close relative or to fire someone because of her religion (this latter action is also illegal in the United States). A manager’s spreading a rumour that an employee has AIDS or is having a illicit affair is also generally seen as a unethical breach of privacy.

Relationship of Employees to the FirmNumerous ethical issues also surround the relationship of employees to the firm, especially in regard to conflicts of interest, secrecy, and honesty in keeping expense accounts. A conflict of interest occurs when a decision potentially benefits the individual to the possible detriment of the organization. For example, if a manager in charge of selecting a new supplier accepts gifts from one supplier trying to land he account he may award the contract to that supplier even thought another one might have offered the firm a better deal. To avoid such conflicts of interest. Wal-Mart Stores, Inc does not allow its merchandise buyers to accept meals or gifts from sales representatives. Divulging company secrets to a competing organization is also unethical, as is padding an expense account. Event so, some managers routinely add false meals, service charges, and car mileage to their expense account reports to unethically pad their income.

Relationship of the Firm to Other Economic Agents

Managerial ethics also come into play in the relationship between the firm and other economic agents. Normal business ethics in customer relations suggest that products be sage, be accompanied by information about product features, uses, and limitations; and the reasonably priced. The behaviour of manages toward competitors is also dictated by ethical standards-unfair business practices (for example, pricing products low to drive a competitor out of business) and denigration of competitors (such as making false claims in advertising about a competitor’s products) are example of unethical treatment of competitors. Similarly, ethical standards also dictate that managers be truthful with stockholders. The CEO of Regina Co.,Inc., was recently charged with violating regulations of the Securities and Exchange Commission. He allegedly altered financial records to make it seem as though the firm had more cash reserves that it actually did, and he told investors that the firm was making high profits when it was really operating at a loss. Managers should also be fair and honest with suppliers, dealers, and unions. Convincing a supplier that a price break is needed of convincing a union that wage concessions are needed because of impending losses is unethical if the firm actually expects to make a profit. “ Management in Practice” discusses some ethical issues regarding Dow Corning’s dealings with its customers.

Ethics in an Organizational Context

It is vital to note that ethical or unethical actions by particular managers do not occur in a vacuum. Indeed, they most often occur in an organizational context that is conducive to them. Actions of peer managers and top managers, as well as the organization ‘s culture, all contribute to the ethical context of the organization. A recent Wall Street scandal at Salomon Bothers Inc. involved illegal transactions in the bond market. It occurred in an organizational context that stressed making money and controlling information

The starting point in understanding the ethical context of management is the individual’s own ethical standards. Some people, for example, are willing to risk personal embarrassment or lose their job before they would do something unethical. Other people are much more easily swayed by the unethical behaviour they see around them and other situational factors, and they may be willing to commit major crimes to further their own careers or for financial gain. Organizational practices may strongly influence the ethical standards of employees. Some organizations openly permit unethical business practices as long as they ain the best interest of the firm.

If a manager becomes aware of unethical practice then allows it to continue, he has contributed to the organizational culture that says such activity is permitted. For example, when the CEO of Beech-Nut discovered that his firm was using additives in its apple juice advertised as 100- percent pure, he decided to try to cover up the deception until the remaining juice could be disposed of. Many employees participated in his plan. When the cover-up was finally discovered, the company suffered grave damages to its reputation and had to pay several million dollars in fines. In addition, the CEO was sentenced to a jail tem.

The organization’s environment also contributes to the context for ethical behaviour. In a highly competitive or regulative industry, for example, a manager may feel more pressure to achieve high performance. In Japan managerial success is often determined by the kinds of connections the manager is able to establish with important people. One Japanese manager Hiromasa Ezoe, CEO of the Recruit Company conglomerate, was recently found guilty of giving lucrative stock options to a variety of well-placed governmental officials to facilitate this process of networking.

Managing Ethical Behaviour

Spurred partially by the recent spate of ethical scandals and partially from a sense of enhanced cooperated consciousness about the importance of ethical and unethical behaviours, many organizations have re-emphasised ethical behaviour on the part of employees. This emphasis takes many forms, but any efforts to enhance ethical behaviour must begin with top management. It is this group that establishes the organization’s culture and defines what will and will not be acceptable behaviour. Some companies have also started offering employees training in who t cope with ethical dilemmas. At The Boeing Co., for example, line managers lead training sessions for other employees, and the company also has an ethics committee that reports directly to the board of directors. The training sessions involve discussions of different ethical dilemmas that employees might face and how managers might handle those dilemmas. Chemical Bank, Xerox., Corp and McDonell Douglas Corp. have also established ethics training programs for their managers.

Organizations are also going to greater lengths to formalize their ethical standards. Some, such as General Mills, Inc., Johnnson & Johnnson, have prepared guidelines that detail how employees are to treat suppliers, customers, competitors, and other constituents. Others, such as Whirlpool Corperation and Hewlett-Packard Co., have developed formal codes of ethics-written statements of the values and ethical standards that guide the firm’s actions.

Of course, no code, guideline or training program can truly make up for the quality of an individual’s personal judgement about what is right behaviour and what is wrong behaviour in a particular situation. Such devices may prescribe what people should do, but they often fail to help people understand and live with the consequences of their choices. Making ethical choices may lead to very unpleasant outcomes-firing, rejection by colleagues, and the forfeiture of monetary gain, to name a few. The manager at Beech-Nut who alerted authorities to the apple juice deception eventually resigned because others thought he was a traitor to the organization. Thus mangers must be prepared to confront their own conscience and weigh the options available when making difficult ethical decisions.

2.2Social Responsibility and Organizations

As we have seen, individuals have ethics. Organizations themselves do not have ethics, but they do relate to their environment in ways that often involve ethical dilemmas and decisions. Social responsibility is the set of obligations an organization has to protect and enhance the society in which it functions. The sections that follow trace historical and contemporary views of social responsibility, identify organizational constituencies, and describe the type of approaches an organization might take toward the social or environmental consequences of its practices.

Historical Views of Social Responsibility

Views of social responsibility held by organizations, the government, and the public at large have changed dramatically over the last hundred years, In particular , there have been three critical turning points in the evolution of social responsibility. The first, called the entrepreneurial era, occurred in the United States during the late 1800s. The so-called Captains of Industry, including John D. Rockefeller, Cornelious Vanderbilit, J.P. Morgan, and Andrew Carnegie, were amassing fortunes and building empires in industries including oil, railroads, banking, and steel. Before their time, virtually all businesses were small, so these men were truly the first executives to control power to control power and wield influence at a national level. Unfortunately, they often chose to abuse their power though such practices as labour lockouts, discriminatory pricing policies, kickbacks, blackmail, and tax evasion. Eventually, outcries form public officials forced the government to outlaw some business practice and restrict others. These laws were important in that they defined a relationship among business, the government, and society and indicated for the first time that business, the government, and society and indicated for the first time that business had a role to play in society beyond the pure maximization of profit

Subtle changes in view toward social responsibility continued throughout the early part of the century, but the next turning point did not occur until the Depression era of the 1903s. By this time, large organizations had come to truly dominate the U.S. economy, and many people criticized them for irresponsible financial practices that led to the stock market crash of 1929. As a part of Franklin Roosevelt’s New Deal, the government passed several more laws to protect investors and smaller business, and the Securities and Exchange Commission was created in 1934 to regulate the sales of securities and curb unfair stock market practices. As outgrowth of these and other actions, the social responsibility of organizations was more clearly delineated. In particular, the new governmental actions insisted that organizations take an active role in promoting the general welfare of the American public

The third major turning point in social responsibility came during the social era of the 1960s. This period of U.S. history was characterized by the war in Vietnam in particular energized the public to examine the nation’s values, priorities, and goals. Government once again took a closer look at organizational practices. Tighter restrictions on pollution, consumer warnings on products such as cigarettes and flammable children’s clothing and increased regulation of many other industries all grew from concerns raised during this period. This growing trend toward social responsibility raises two important questions: exactly to whom is business responsible, and who in an organization is ultimately accountable for the organization’s practices? We address these questions in the next section.

Area of Social Responsibility

Organization may exercise social responsibility toward their constituents toward the natural environment, and toward the general social welfare social entities closer to the organization will have a clearer and more immediate stake in what the organization does, whereas those further removed will have a more ambiguous and longer-term stake in the organization and its practices

Organizational ConstituentsWe described the task environment of organizations as those individuals, groups, of organizational directly affect a particular organization but are not part of the organization. Another view of that same network is in terms of organisational constituents, of those people and organizations who are directly affected by the practices of an organization and that have a stake in its performance.

The interest of people who own and invest in an organization will be affected by virtually anything the firm does. If the firm’s managers are caught committing criminal acts or violating acceptable ethical standards, the resulting bad press and public outcry will likely hurt the organization’s profits and stock prices.. Organizations also have a responsibility to their creditors. If poor social performance hurts an organization’s abilities to repay its debts, those creditors and their employees will also suffer.